1. Fixed Assets (Capital Assets)
CAS 500 – Audit Evidence
CAS 520 Analytical Procedures

2. The Nature of Capital Assets
Typically capital assets are used in manufacturing
Operational use and normal life of greater than one year

3. Tracking Capital Assets
Large organizations
The source of information for
Small organizations may have a manual listing of such assets

4. Audit Emphasis for Manufacturing Asset Additions
Emphasis is on auditing
For tax purposes
Amortization and accumulated amortization

5. Categories of Audit Tests for Capital Assets
Audit emphasis is the verification of:
Current-year acquisitions
Current-year disposals
The ending balance in the asset account
Amortization expense
The ending balance in accumulated amortization
For tax purposes

6. Analytical Procedures for Capital Assets
Compare amortization expense divided by gross manufacturing equipment cost with previous years
Compare accumulated amortization divided by gross manufacturing equipment cost with previous years
Compare monthly or annual repairs and maintenance, supplies expense, small tools expense, and similar accounts with previous years
Compare gross manufacturing cost divided by some measure of production with previous years

7. Verification of Asset Balances
Relevant internal controls over existing assets
Audit tests
Agree last years ending balances
How about asset additions and disposals?

8. Verification of Current Year Acquisitions
Important because
Starting point is normally a continuity schedule prepared by the client
An important technique is examination of

9. Verification of Current Year Disposals
The most important internal control over disposals is the existence of a formal method to inform management
The most important audit procedures are
Vouch disposal to

10. Verification of Amortization Expense and Accumulated Amortization
Primary audit objectives involve determining whether the client is:
Accumulated Amortization
Debits are normally tested as a part of
Credits are verified as part of

11. Financial Statement Presentation of Fixed Assets
On the balance sheet: On the income statement: In the notes:

12. Audit of Prepaid Expenses
Prepaid expenses arise from the concept of matching expenses with revenues
Prepaid insurance is a common expense
Look at the file of insurance policies in force

13. Problem DC Page 691
You are the auditor of Bittern Inc. Bittern’s long-standing policy is to capitalize all repairs and maintenance payments that exceed $10,000, without assessing the nature of the expenditure. Many of Bittern’s building and equipment are aging, and repairs are becoming frequent and more expensive. You have concerns that a material amount of building repairs and maintenance expense is being capitalized, so you undertake a detailed examination of all the building asset additions during the current year. Your analysis indicates that approximately $400,000 of repairs expense has been capitalized as building in the current year. Materiality for the audit is $500,000. In the prior year’s audit, the staff noted approximately $100,000, of repairs expense had ben capitalized, but no adjustment was recorded. The estimated useful life of Bittern’s buildings is 25 years, and the average remaining useful life of their buildings is approximately 8 years.
Required:
Describe the impact of the above error on the current-year financial statements and the impact it will have on future periods’ financial statements when the error reverses, if it is not adjusted.
Describe the impact the unadjusted error from the prior year will have on the current year’s financial statements.
State whether you would require Bittern to adjust for this error, and support your conclusion. If you require an adjustment, provide the required journal entry.
What recommendation would you include in the management letter relating to the situation above?